Earnings Call: Q4 2022

Mar 15, 2023

Day and thank you for standing by. Welcome to the Q Health 4th Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference call is being recorded. I would now like to go ahead and turn the call over to your speaker for today. Good afternoon, and welcome to Q's Q4 2022 earnings conference call. Joining me today are Aayub Khattak, Chairman and Chief Executive Officer of Q Health and Asim Javed, Incoming Chief Financial Officer. Before we get started, let me begin by reminding you that we may be making forward looking statements, including statements related to the Effective performance of our business, future financial results and guidance, strategy, long term growth and overall future prospects, as well as the impact of the COVID-nineteen pandemic. These statements are subject to risks, uncertainties, assumptions and other factors that could cause actual results to differ materially from those described. These risks and uncertainties include, but are not limited to, those outlined in today's call as well as other risks identified from time to time in our public statements and reports filed with the SEC. Forward looking statements that we have made on this call are based on assumptions and beliefs as of the date they are made, and the company disclaims any obligations to update these statements except as required by law. In addition, on today's call, non GAAP financial measures will be used. Reconciliations between GAAP and non GAAP financial measures are included in our earnings release. Finally, I would like to mention to you that the press release and a recording of this call will be available on the Investor Relations page of our website. With that, I'd like to turn the call over to Aayush. Thank you, Lorna, and thank you, everyone, for joining us today. The Board and I are pleased to officially welcome Asim Javed to our executive leadership team as he has recently been appointed as our Chief Financial Officer. Asim is a seasoned finance executive and has been with CU for the last 2 years as VP of Financial Planning and Analysis and Treasurer. Asim also led financial planning going into our IPO. Prior to Q, Asim held a variety of finance roles at Beck and Dickinson, Heinz and General Motors. Austin graduated from McGill University with a finance and accounting degree and holds an MBA from Harvard Business School. With his experience and demonstrated leadership abilities, Austin was a national choice and we look forward to his continued contributions as CFO. I am pleased to report that CU's financial performance for the Q4 delivered $146,000,000 of total revenue and $54,000,000 excluding $92,000,000 of deferred revenue, which exceeded our prior financial guidance. We ended the year with over $240,000,000 of cash on hand and untapped $100,000,000 revolving credit facility. While all of this has been done predominantly with our COVID-nineteen product, we are executing well on our strategy of expanding our test menu, along with increasing the scope of our integrated care platform to allow greater actionability on diagnostic test results and an Expansion of the types of tests and treatments that can be delivered quickly and conveniently through Q. In 2022, Our test menu expansion growth drivers centered on diagnostic tests for our Q Health monitoring system, which consists of our Q reader, test cartridges and sample collection wands. Our near term focus and development milestones were for programs in both the respiratory and sexual health categories. I'm happy to report that we continue to make significant progress with our respiratory health test. We submitted the flu AB standalone de novo application, the flu plus COVID multiplex UA and the COVID-nineteen de novo application. We are pleased with the level of engagement and dialogue between CU and the FDA and we continue to anticipate that we will be able to bring to market a comprehensive respiratory health offering by the year end. To round out our respiratory product offering, we have completed our clinical studies for RSV and have begun our clinical studies for strep throat. RSV is a respiratory condition that can be dangerous for infants and young children and the elderly. According to the CDC, 2,000,000 visits to the hospital occur averaged due to RSV annually with over 50,000 children hospitalized and another 100,000 hospitalizations for people over 65. Last year, RSV left into public awareness as it impacted many families. Our clinical studies are complete, During high accuracy for our molecular test, the QRSV clinical study started in the Q3 of 2022 as anticipated, and we intend to submit this important diagnostic test to the FDA during the Q2 of 2023 seeking full clearance. We began our clinical study for strep throat in Q4. Strep throat is another frequent respiratory illness that spreads quickly and is typically contracted through close contact with people who already have this bacterial infection. We believe our CUE strep throat molecular test offers a chance to detect strep early and allows for targeted antibiotic use to decrease the risk of complications. We started this clinical study in the Q4 of 2022 and we anticipate submitting strep throat for FDA review in the second half of this year. Moving to the sexual health category, where we have an ongoing program for chlamydia and gonorrhea. While the CDC recommends routine testing for all sexually active adults, the current level of testing is not sufficient as the number of chlamydia and gonorrhea infections has increased every year for the past 6 years. Our platform allows healthcare professionals and individuals to screen more easily and if positive enables quick delivery of the proper antibiotic. Q's chlamydia and gonorrhea clinical study began enrollment during the Q4 of 2022 as planned. We plan to submit this test to the FDA during the second half of this year. In addition, to support our goal of having a robust test menu, which adds to utility of the QF monitoring system, We are pleased to report that we have completed clinical studies and submitted an EUA for our high sensitivity molecular mpox test, formerly known as Monkeypox, to the FDA for point of care use. Overall, we are proud to have achieved or exceeded all of our menu expansion milestones we set out to meet in 2022, including 4 FDA submissions, completion of RSV studies and commencement of clinical studies for strep throat and chlamydia, gonorrhea. For 2023, we are committed to delivering 4 high quality FDA submissions. We plan to submit the RSV molecular test in the second quarter followed by submissions for strep throat and chlamydia and gonorrhea molecular test during the second half of twenty twenty three. We've already submitted our mpox test in the Q1 of 2023. Given that more menu on Q reader is the number one I am from our existing customers and the most important factor for new customer adoption. We're happy with the excellent progress by our product, R and D, clinical and regulatory teams. Now I'm going to shift to our digital capabilities growth driver, which has been key for the stickiness of our product to date and we believe it's fundamental to the product platform for the future. When we started the company more than 10 years ago, We understood that every healthcare journey begins with diagnostics. In fact, roughly 70% of all clinical decisions are made utilizing diagnostic data. Our strategy was to transform healthcare with a simple, fast, accurate solution centered on the user, whether that be a clinician in a doctor's office or an individual at home with the goal of enabling customers to have reliable information at their fingertips to make faster and more informed healthcare decisions. I'm pleased to share that with the recent launch of Q Care, our virtual care delivery solution, the Q integrated care platform is now reality, allowing individuals to test from home, Talk with a clinician immediately and get treatment delivered to their home within hours. This is a very significant upgrade on the healthcare delivery experience we believe a foundational concept for the future of healthcare. Additionally, our platform has been integrated to major EMR systems to allow for seamless interoperability between clinician, their EMR and Q diagnostic capabilities. We view Q Care as a building block capability that allows for integrating clinicians visit into any diagnostic or treatment journey. Soon after launching, We expanded the acute care experience to allow customers to upload results from any COVID-nineteen test, including antigen, as well as third party influenza and urinary tract infection tests to go through the same virtual care and e prescription process. Last December, the Minnesota Department of Health elected Q in a competitive bid to provide a statewide telehealth treatment program to all residents. Indy Minnesotan can now access Q Care for on demand virtual consultation with a healthcare professional and prescription delivery if medically indicated. Last month, this contract was extended to June 2024. By providing an end to end solution, Q has a unique opportunity to provide specific health information to customers when they need it most. For example, this month, we announced a partnership with Pfizer to make educational resources available on the QLs app to raise awareness among individuals with underlying conditions about the risk of COVID-nineteen and their options for treatment. This is just one example of how we are pursuing our mission to empower people to live their healthiest lives. I'd also like to highlight an important recent product category launch. Leveraging our integrated care platform and the Q Care building block, We have further expanded our testing menu by recently launching 13 at home test kits. For example, we have a 9 target sexually transmitted infection panel that can be done from anywhere, a test kit for several heart health markers, a test kit for food sensitivities and fertility panels for women. All of these allow for discrete personalized care and treatment. Through our platform, individuals can order these test kits through the Q Health app or on our website, receive sample collection kits at home and mail their sample back to a CLIA certified diagnostic lab. After processing by the lab, Test results are securely and privately delivered back to the customer in the Q Health app. Customers can also consult with a Clinician for personalized care and arrange for delivery of any prescribed treatment via Q Care. Q is the 1st company to offer a complete Diagnostic test at home and at the point of care seamless integration with clinicians and their EMRs and treatment delivery. We believe that by adding these new at home test kits to our platform, Q will have the market's most compelling value proposition for home and point of care diagnostic needs. In the future, we expect to address even more conditions as we expect continue to execute on our strategy. As an example of how the integrated care platform comes together, I'd like to highlight our recently launched partnership with Scripps Research Translational Institute. Scripps is conducting a remote trial utilizing CUE's Test to treatment platform, including CUBE diagnostic tests, CUBE Care and home medication delivery aimed at reducing COVID hospitalization rates for immunocompromised individuals. We believe that early detection of COVID in this vulnerable population combined with easy access to antiviral treatment will lead to better health outcomes. This study is an important initiative for efforts with payers. As you know, reimbursement already exists for the test in our menu expansion pipeline in the point of care setting, And we feel there is a significant opportunity to extend reimbursement models into the home. Fundamentally, we believe there is alignment between payers, patient needs and what Queue can offer, especially for certain populations that are more vulnerable to respiratory disease and at a greater risk for negative outcomes. For example, immunocompromised individuals can benefit from on demand testing at home in order to get earlier detection and earlier treatment to avoid expensive Hospitalization. We believe data from studies like the one underway at Scripps can play a key role in discussions with payers as they evaluate the value of coverage on out of home testing, especially with the public health emergency ending resulting in a loss of coverage of home antigen tests. Turning to the expansion of our customer base. Today, we have a broad and diverse installed base of major players in every industry, including tech, sports leagues, healthcare and finance. We've shipped over a quarter 1000000 Q readers and sent over 15,000,000 diagnostic tests directly to consumers, providers, public and enterprise customers. I'm pleased to share that we have achieved over $1,000,000,000 of sales in the last 2 years from the launch of our first product. I'm proud that we provide the number one Most accurate COVID test available for home use. With the expected expansion of the QF monitoring system test menu on the horizon and the expanded capabilities of our integrated care platform, we are excited about delivering our customers the broader offerings they're looking for and believe this will allow us to return to growth in the second half for this year. I'd like to end by commenting on our cost reduction plan. I made the difficult decision reduce costs as we adapt to the realities of the current macro environment. We expect these actions to result in cash savings of approximately $100,000,000 on an annualized basis. We believe we have sufficient liquidity to realize the benefits of our significant investments in R and D to date without entering the capital markets during 2023. Looking forward, we will continue to focus on programs that will generate near term revenue, including completion of our ongoing clinical studies for point of care and at home test cartridges and new product launches. We believe our conservation of cash objective will moderate the pace of further testing new expansion programs. In summary, I'm extremely proud of the strides the team has made during 2022 with 4 regulatory submissions to expand our test menu, the nationwide launch and subsequent expansion of treatment delivery with acute care and new strategic partnerships in support of our mission to enable personalized proactive and informed healthcare that empowers people to live their healthiest lives. With that, I'll turn the call over to Asim. Thank you, Ayub, and good afternoon. I'm happy to be talking to you for the first time as a newly appointed CFO. Now, I will walk through our financial results before sharing our revenue guidance. CU's 4th quarter total revenue was $146,800,000 including the recognition of $92,400,000 of deferred revenue, which was the remaining balance associated with our agreement with the U. S. Department of Defense. Revenue excluding this deferred revenue was $54,400,000 which was better than expected as COVID testing demand was higher than anticipated and we saw strong reordering from existing customers. In the quarter, our private sector contributed 96% were $52,400,000 of sales on an adjusted basis. Public sector revenues, excluding the deferred revenue, was $1,900,000 and total desk cartridge sales were $50,500,000 Moving down the P and L, Q4 adjusted product gross profit margin was 18% when excluding one time impacts of deferred revenue and inventory adjustments, reflecting higher unit costs driven by lower overall production volume in the quarter. Q4 total operating expenses were $94,600,000 Sequentially, Q4 operating expenses were slightly higher than Q3 spend of $86,400,000 Sales and marketing expense was $19,300,000 in the 4th quarter and that is comparable to the 3rd quarter spend. R and D expense was $56,100,000 for Q4, an increase from the prior quarter spend of $42,500,000 as we ramp spend for the ongoing clinical trials and regulatory submissions. G and A expense was $19,200,000 during Q4 of this year, a decrease from our Q3 spend of $25,600,000 As a result, adjusted net income was a loss of $74,400,000 or $0.50 per diluted share. Adjusted EBITDA for the Q4 was a loss of $54,000,000 Moving on to full year 2022, CUES total revenue was $483,500,000 or $391,100,000 excluding the recognition of DoD deferred revenue. Private sector revenue accounted for 96% or $374,700,000 and public sector revenue accounted for 4% or $16,300,000 on an adjusted basis. S. Cottage sales were $358,100,000 in 2022. Adjusted product gross profit margin for 2022 was 38%. Adjusted operating expenses were $357,100,000 for the full year 2022, including sales and marketing expense of $88,600,000 R and D expense of $171,500,000 and G and A expense of $97,100,000 Adjusted net loss for the full year 2022 was $191,800,000 or $1.29 per share and adjusted EBITDA for the year was a loss of $91,500,000 Moving to the balance sheet, we ended 2022 with cash of $241,500,000 Additionally, we have $100,000,000 secured revolving credit facility, which remains undrawn. As a reminder, CU operates with no debt obligations. Now, I'd like to move to our guidance. For the Q1, we expect revenues of $20,000,000 to $25,000,000 As you know, forecasting COVID testing demand beyond the near term is challenging. Therefore, we will limit our forecast to quarterly expectations. In summary, the company continues to report better than expected revenue performance and deliver on our growth drivers as we continue to execute on our strategy to create connected and intuitive health solutions. While our balance sheet is strong, we Understand the challenges of the current macroeconomic environment and took action to reduce expenses in an effort to preserve cash. While we are not giving formal guidance beyond Q1 revenue today, I would like to provide further commentary for modeling purposes. We continue to expect our COVID-nineteen molecular test to generate the vast majority of our revenue in the first half of this year. And we anticipate that new products will begin to contribute revenue in the second half of twenty twenty three, in line with our portfolio diversification efforts. As a result, product gross profit margin is expected to be slightly negative during the first half of this year. However, on a cash margin basis, which excludes certain non cash items such as depreciation, margins are expected to remain positive. We anticipate margin improvement in the second half in line with higher expected volumes. For cash, 1st quarter cash burn is expected to be similar to Q4 on an adjusted basis. Cash utilization is planned to decrease as we move through the year, benefiting from both lower costs and additional revenue streams. We expect cash savings associated with the cost reduction plan will be approximately $100,000,000 on an annualized basis. We believe that the strong cash position of our balance sheet and our ability to manage spend will allow us to avoid the need to enter the capital markets in 2023. With that, I would like to thank you for your attention. And I'll now turn the call over to the operator for questions. Thank you. As well limit yourself to 1 question and one follow-up. One moment while we compile the Q and A roster. First question that we have is coming from Tiyush Sivan of Morgan Stanley. Your line is open. Hey guys, good evening and thanks for the time here. Aayub, one for you on the menu progress here. Can you just remind us how do you think about sort of time to reimbursement following FDA approval? And as you think about the tougher macro backdrop here and potentially weaker sort of consumer spending trends, how are you thinking about the Weaker sort of consumer spending trends. How are you thinking about the rollout for your readers and subscriptions in 23, any adjustments to pricing that you're contemplating this year? Thanks for the question, Tejas. So with regards to reimbursement, our near term menu, the 3 tests that we've already the 4 tests that we've already submitted to the FDA And the 3 additional ones we plan on submitting this year. The reimbursement situation is already plumped into the point of care. That's obviously a big opportunity for us. We've talked about it in the past that the point of care, urgent cares, doctors' offices and you've seen a lot of consolidation in the provider space recently. And they all need testing. So we do see a great opportunity for the reimbursement that's already there for that And it's aligned very nicely to our existing test menu expansion plans. So as we look forward, there's When you look at the pricing and you look at the reimbursement model there, I think our pricing is nicely in our COGS and in the way that we've already Structured our manufacturing are well in line with what the market is expecting and so we're feeling good about strategy there. Got it. That's helpful. And then do you have any sense for when you expect to hear back from the FDA on the flu and the flu plus COVID multiplex Steph following your submission and it sounded from Asim's comments like you're not expecting any non COVID Sort of respiratory revenue in the Q1, is that correct? And should we expect that to start coming in at a lower level in 2Q and then ramp from there into year end? The dialogue with the FDA has been really positive. We feel really confident that in the second half of this year we'll have the non COVID revenue, So with a broader respiratory offering. So while the submissions we put in very high quality submissions with what we thought was very good clinical data And we feel the momentum now with FDA. So but we don't have anything to announce today. We do think that we're in good shape to get these approvals and we're feeling confident about it. Got it. And then on the sample collection expansion that you just announced here, Are you thinking of this as essentially another channel by which you can get more patients on to Q Care? Or is this potentially a standalone revenue generator? Any color you can share on the economics there for you guys versus the lab that runs the sample? And what's assumed in your 2023 guide? And just Help us think about sort of the value proposition and how you're differentiating it versus folks like LabCorp or Everly or one of those players in the market? Yes, we see the expanded test kits as a very important complement to the Q Health monitoring system. Both are infused with Q Care. Q Care is the clinician element that is part of the sort of total platform. And it allows just actionability for whatever diagnostic results are there. So our mission to empower people with this information and let them live their It's really consistent with that by giving them more information now. And so when we looked At expanding the platform and from the beginning, we really want to be able to provide more information and be able to still make that very accessible and convenient. So by having these test kits, we really open up a new area for ourselves. It is for products, Portfolio diversification, revenue diversification and it's a great on ramp from our for our customers. And we've had a lot of feedback from the customers that they want more menu for the QoS monitoring system, but also just more products. And so Really looking forward to rolling this out. Yes. Hey, Jessica, awesome here. I'll add that our guide for the first half is predominantly COVID revenue and this is still early, right? We just announced this. This is still early as we have more to share. At the appropriate time, we'll share that. Got it. Thanks guys. Appreciate the time. Thanks. Thank you. One moment while we prepare for the next question. Our next question will be coming from Charles Rhyee of Cowen. Your line is open. Hi. This is Lucas on for Charles. I want to ask about the $100,000,000 in the expected OpEx reduction. Should we be thinking that $100,000,000 comes off of your guys' 4x I'm sorry, 4th quarter OpEx run rate or We're off of 3Q given the increased R and D spend in 4Q. And then How should we think about where that OpEx reduction falls in terms of coming in sales and marketing, R and D and then general and admission or administrative? Hi, thanks for the question. To start with, we have a strong balance sheet. We have over $240,000,000 in cash. We have $100,000,000 revolving credit facility that's untapped. We operate without any debt right now. And the good thing is if we think about our spend From a manufacturing standpoint, a manufacturing footprint is has already been built. So that's in the rearview and it's also forward compatible with the menu of tests that we're looking to get approved. So as we think about that and we look forward, we decided to execute on the cost reduction plan, Understanding the macroeconomic environment and the need to preserve cash such that We don't have a need to enter the capital markets in 2023. In terms of how that spend comes Think about it as the savings kind of accumulate through the quarters. Okay. I appreciate it. And then since launching Q Care, can you guys give us Sense of how much revenue that's been able to bring as a platform as itself and then just how it's resonating in the market, particularly and conversations with employers? Yes. So we see Q Care as a really important foundational element to the platform. What it Effectively does is it brings the clinician into the experience, into the app, into the web and allows for people to Go from a diagnostic result to actionability instantly, very conveniently. And some of our early wins like with Minnesota Department of Public Health, We announced that we have a contract with them that was renewed recently that allows for any Minnesotan to access Q free of charge and to To talk to the clinician and get medication delivered. And furthermore, when we look at just In general, the integrated care platform that we've been building, the ability to have the clinician on the other side of a test results, a test kit for Sexually transmitted infections for heart health panels, etcetera. It's a really important value add. So we're not really breaking out Q Care is a specific revenue stream at this time. I think one way of thinking about it is that it's a really important value add to our existing tests and to the planned test menu. Thank you. One moment while we prepare for the next question. Our next question is coming from Matt Sykes of Goldman Sachs. Your line is open. Hey, good afternoon, everybody. Thanks for taking my questions. Maybe just the first one, If you maybe help us out within the private sector sort of what the current split is between sort of enterprise consumer and providers and kind of interested in given The reimbursement within the point of care channel, like what type of exposure do you currently have in point of care And how are the sort of discussions proceeding with that particular end market? Yes. When we think about our revenue to date and as well as the guidance, I'd say it's a combination of For private sector, within the private sector, the enterprise, the direct to consumer as well as the provider. A couple of quarters ago, we gave some guardrails around how direct to consumer is performing. Think about direct to consumer performing Kind of similar proportions to the way it was a couple of quarters ago. But overall, our revenue that we exceeded our expectations Was coming from across the board in the private sector exceeding our expectations. Got it. Thanks. And then just awesome on just sort of expectations for cash burn this year, understanding you've reduced The cost base quite a bit, but just sort of any sort of guidance you can give us for modeling purposes on that for 2023? Yes. As we said in our prepared remarks, our Q1 cash burn was Similar on an adjusted basis to Q4 and then that cash burn is expected to decrease through the year such that we wouldn't need So our expectation is we wouldn't need to enter the capital markets. We are very conscious about the macroeconomic environment And we will continue to moderate spend, while executing our strategy so that we don't have to enter the capital markets in this Got it. All right. Thanks very much. Thank Our next question is coming from Mark Massaro of BTIG. Your line is open. Hey guys, thank you for the questions. I just wanted to clarify with the revenue recognized From the deferred with the U. S. Department of Defense, can you just confirm, does that mean that that contract has likely run its course? I guess my real question is, are you expecting any material orders from the DoD going forward? Hey, Mark. So the conclusion of this first contract with DoD, yes, I think that's a safe assumption that that was That's the conclusion there. I think as we look forward, we do think the public sector remains active in Wanting to mitigate the effect of transmitted infections, including respiratory infections, including sexual health infections. We're seeing Various states stepped up and into the role of helping protect their citizens by offering services like QCARE, for example, Minnesota. And we do still work with states and for the actual QL monitoring system and the COVID-nineteen test cartridges as well. So as we open up new product areas, we do think that there's more opportunity to attract to the public sector. And then in the long term, we have I've been able to build this production capacity in part with the government's this contract and that is for compatible with the rest of our menu. So A lot of great things came out of this agreement that we've had with the DoD. We've built a lot of great infrastructure that will serve us into the future and serve The nation with this capability. That sounds great. And then maybe a follow-up on the kits business. I think some of us are certainly appreciating the fact that this is a complement, It doesn't overlap with your point of care strategy, though there is competition in this space. And so I think we're trying to figure out How much revenue you can drive from this, understanding that there are some other players in the space and just maybe how differentiated do you think Getting results on the Q app might be, and in what ways, Ayub, can you market this, to really be different than some of the other modalities? Yes, great question. So as you rightly pointed out, this is a complement to the QoS monitoring system. With the Q Health monitoring system, we can deliver this really accurate molecular information at the point of care or in the home And how they integrated with EMRs and or allow for the acute care experience to deliver treatments on the back of a diagnosis. So Really happy about that. But then being able to complement that with this 13 other tests that we've rolled out, what that allows us to do is, There is a market for that that already exists and people want different folks want different things and they want broader panels, they want They don't mind waiting a little bit more time. And so you really want something for both parts of the market that's going to lead to more engagement overall. That's going to allow for just there to be more content for people to consume on the platform. So we think that it's part it's an important part of just And the product portfolio and giving more products to people for their different needs. So with the, for example, 9 member Sexually transmitted infection panel, you can provide your sample and be able to get the information and then be able to literally Get the right treatment delivered to your door and you don't have to you can do all that from the privacy and convenience of your own home. So So it's a great offering on the Q platform and we think that over time as we expand the offering, it's just a great complement and we want to drive engagement. We want to drive More products for our customers. Excellent. And awesome congrats on the promotion of CFO. I think I heard you say that we should expect gross margins to turn negative, I think in the first half of twenty twenty three. Is it right to think that if you get approval of flu and other non COVID testing revenue in the back half of the year That gross margins could inflect positively again. Is that a fair assumption? Thanks, Martha. Pleased to be here as a CFO talking to you. Yes, as far as gross margin goes, you're right. In the first half of the year, our guide was be slightly negative, but again that does include non cash items such as depreciation. So on a cash basis, we do expect the first half Margin to be positive. And then as we get more volume, margin would improve. So the margin does track with volume. As we get approvals and we get more volume, we'd expect margins to improve. All right. Sounds good. I'm looking forward to the launch of the flu test later this year, but thanks for all the time. Thank you. Thank you.